ARTICLE IN PRESS

Journal of Monetary Economics 54 (2007) 2521–2533

www.elsevier.com/locate/jme

Does inflation targeting really make a difference?

Evaluating the treatment effect of inflation targeting
in seven industrial countries$
Shu Lin, Haichun Ye
Department of Economics, Florida Atlantic University, 777 Glades Road, Boca Raton, FL 33431, USA
Received 4 July 2006; received in revised form 27 May 2007; accepted 7 June 2007
Available online 20 June 2007

Abstract

We evaluate the treatment effect of inflation targeting in seven industrial countries that adopted
this policy in the 1990s. To address the self-selection problem of policy adoption, we make use of a
variety of propensity score matching methods recently developed in the treatment effect literature.
Our results show that inflation targeting has no significant effects on either inflation or inflation
variability in these seven countries. Further evidence from long-term nominal interest rates and
income velocity of money also supports the window-dressing view of inflation targeting.
r 2007 Elsevier B.V. All rights reserved.

JEL classification: E4; E5

Keywords: Inflation targeting; Inflation; Propensity score matching

1. Introduction

Inflation targeting has become a popular framework for the conduct of monetary policy
since the early 1990s. Compared to other targeting regimes (e.g., monetary or exchange
rate targeting), inflation targeting features an explicit target for inflation and greater

$
The authors would like to thank Editor Robert G. King, an anonymous referee, and Kevin Grier for valuable
comments. Any remaining errors are ours.
Corresponding author. Tel.: +1 405 370 4052; fax: +1 561 297 2542.
E-mail address: haichunye@gmail.com (H. Ye).

0304-3932/$ - see front matter r 2007 Elsevier B.V. All rights reserved.
doi:10.1016/j.jmoneco.2007.06.017
 ARTICLE IN PRESS
2522 S. Lin, H. Ye / Journal of Monetary Economics 54 (2007) 2521–2533

emphasis on central banks’ transparency, credibility, and accountability in conducting

monetary policies. Proponents of inflation targeting have claimed many benefits of
adopting this policy, chief among which is that it helps to alleviate the dynamic
inconsistency problem, and thus should lead to lower (expectations of) inflation and
inflation variability.1 The fact that targeting countries experienced lower inflation and
inflation variability after adopting inflation targeting is often used as strong evidence for
this framework. On the other hand, opponents argue that inflation targeting is merely
conservative window dressing.2 In their view, what actually led to the lower inflation in
these targeting countries was their decision to aim for lower inflation than in earlier periods
and their corresponding efforts. They argue that inflation targeting, per se, contributed
very little, if anything, to the lower inflation and inflation variability, and point to evidence
that non-targeting countries have also experienced lower inflation and inflation variability
since the mid-1980s.
This debate is ultimately an empirical issue. Early empirical studies in the literature often
apply time series techniques to country case studies and provide mixed results.3 Recent
cross-country studies in the literature include Johnson (2002) and Ball and Sheridan
(2003). Johnson (2002) examines the effect of inflation targeting on the behavior
of expected inflation in a panel of 11 industrial countries. He finds mixed results: the
level of expected inflation in targeting countries does fall after the announcement of
targeting, but neither the variability of expected inflation nor the average absolute
forecast errors fall after targeting. Ball and Sheridan (2003) investigate the influence
of inflation targeting on economic performance in 20 industrial countries. Using cross-
section regressions, they show that the beneficial effect of inflation targeting is
insignificant.
In this study, we use a new data set and a new methodology to evaluate the treatment
effect of inflation targeting in seven industrial countries that adopted this policy in the
1990s. We make two important contributions to the literature. First, our study employs the
most comprehensive data set to examine this issue, covering 22 industrial countries over
the period 1985–1999. Second, and perhaps more importantly, we make the first attempt in
the literature to formally address the self-selection problem of policy adoption by making
use of a variety of propensity score matching methods recently developed in the treatment
effect literature.
Our main result is that inflation targeting has no significant beneficial effects on
targeting countries’ inflation or inflation variability. The estimated treatment effects of
inflation targeting on long-term nominal interest rates and income velocity of money are
also found to be insignificant in targeting countries. The overall evidence lends strong
support to the window-dressing view.
The rest of our study is organized as follows. Section 2 describes our data set. Section 3
discusses the methodology we use to evaluate the treatment effect of inflation targeting.
Section 4 reports our empirical results on inflation and inflation variability. Additional
evidence from long-term nominal interest rates and income velocity of money is presented
in Section 5. Section 6 offers our conclusions.

1
See Bernanke et al. (1999), Svensson (1997), and Mishkin (1999).
2
This argument is due to Anna Schwartz. See Romer (2006, p. 532).
3
See Ammer and Freeman (1995), Mishkin and Posen (1997), Groenveld (1998), and Kuttner and Posen (1999).
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S. Lin, H. Ye / Journal of Monetary Economics 54 (2007) 2521–2533 2523

Table 1
Starting year of inflation targeting in industrial countries

Country Starting year

Non-constant inflation targeting Constant inflation targeting

Australia 1994 1994

Canada 1992 1994
Finland 1994 1994
New Zealand 1990 1993
Spain 1995 1994
Sweden 1995 1995
United Kingdom 1993 1993

2. Data

The data set for this study includes 22 major industrial countries examined for the years
1985–1999.4 It contains 321 observations.5 Most of the data are drawn from the
International Monetary Fund’s World Economic Outlook and International Financial
Statistics.6
Seven countries—Australia, Canada, Finland, New Zealand, Spain, Sweden, and the
United Kingdom—adopted inflation targeting during our sample period.7 Following the
identification strategy employed by Ball and Sheridan (2003), we define each country’s
starting time of inflation targeting as the first year in which a specific target or target range
was in effect.8 Similarly, following Ball and Sheridan (2003), we define the starting time of
constant inflation targeting as the first year in which a country had an unchanging target or
target range. This is a more restrictive definition of inflation targeting, which we will use to
check the robustness of our results. To avoid confusion, throughout the article we will call
the first definition of inflation targeting non-constant inflation targeting. Table 1 lists the
seven targeting countries and their starting years. According to the definition of non-
constant (constant) inflation targeting, we identify 45 (41) targeting observations and 276
(280) non-targeting observations in our data set.

4
These countries are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece,
Iceland, Ireland, Italy, Japan, New Zealand, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, the
United Kingdom, and the United States.
5
There are nine missing values in year 1999 for some variables in our data set, which is why we do not have a
total of 330 observations.
6
We have also drawn data from OECD Main Economic Indicators (for M1 money stock), Ghosh et al. (2003)
(for five-year central bank governor turnover rate, CBTOR5), Ball and Sheridan (2003) (for the starting dates of
inflation targeting), and Reinhart and Rogoff (2004) (for exchange rate regimes).
7
Two of the targeters, Finland and Spain, adopted the euro in 1999. We still treat them as targeters in year 1999,
for targeting may still have some lagged effect in this short period. Changing them to non-targeters only makes
our results stronger. Switzerland adopted inflation targeting in 1999, but we still consider it a non-targeter in that
year, following Ball and Sheridan (2003).
8
Since Ball and Sheridan (2003) use quarterly data, they define the starting time of targeting as the first quarter
in which a specific target or target range was in effect and the target had been announced publicly at some earlier
time.
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3. Methodology

We turn now to the discussions of our empirical methodology.

3.1. Treatment effect and selection bias

Our objective is to evaluate the treatment effect of inflation targeting in targeting

countries. To estimate this average treatment effect on the treated (ATT), we consider the
following equation:
ATT ¼ E½Y i1 jDi ¼ 1  E½Y i0 jDi ¼ 1, (1)
where D is the targeting dummy. Yi0|Di ¼ 1 is the value of the outcome that would have
been observed if a targeting country had not adopted inflation targeting policy and
Yi1|Di ¼ 1 the outcome value actually observed in the same country. The fundamental
difficulty in estimating the ATT is that the second term on the right-hand side
(E[Yi0|Di ¼ 1]) is not observable. We cannot observe the inflation rate or inflation
variability of a targeting country had it not adopted such a policy. If a country’s targeting
choice is random, one can easily obtain the ATT by comparing the sample mean of the
treatment group (targeters) with that of the control group (non-targeters). However, this
method would generate biased estimates if the targeting decision is not random. In
particular, if the targeting choice is systematically correlated with a set of observable
variables that also affect the outcomes, then we will have the ‘‘selection on observables’’
problem, which makes traditional linear regression an unreliable method.9

3.2. Matching on propensity scores

To address the ‘‘selection on observables’’ problem, we make use of a variety of

propensity score matching methods recently developed in the treatment effect literature.
The central idea of matching is to use a control group to mimic a randomized experiment.
The key assumption needed to apply the matching method is the conditional independence
assumption (Y0, Y1?D|X), which requires that, conditional on X, the outcomes be
independent of the targeting dummy.10 Under this assumption, Eq. (1) can be rewritten as
ATT ¼ E½Y i1 jDi ¼ 1; X i   E½Y i0 jDi ¼ 0; X i , (2)
where we have replaced E[Yi0|Di ¼ 1,Xi] with E[Yi0|Di ¼ 0,Xi], which is observable.
One matching method would be to match the treated units to the control units with
similar values of X. As the number of covariates in X increases, however, this method
would be hard to apply in practice. To overcome this high-dimension problem,
Rosenbaum and Rubin (1983) propose that one can match the treated units and control
9
See Dehejia and Wahba (2002) and Heckman et al. (1998) for detailed discussions. Also, note that the
selectivity problem here is neither selection on unobservables (omitted variables) nor a Heckman-type sample
selection problem.
10
Under the conditional independence assumption, the average treatment effect (ATE) equals the average
treatment effect on the treated (ATT). According to Heckman et al. (1998), the ATT can actually be estimated
consistently under a weaker mean independence assumption (E½Y i0 jDi ¼ 1; X i  ¼ E½Y i0 jDi ¼ 0; X i ), which only
requires that the outcomes in non-targeting countries be independent of the targeting decision, conditioning on
the observed covariates. Under this weaker assumption, ATE and ATT are generally different.
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S. Lin, H. Ye / Journal of Monetary Economics 54 (2007) 2521–2533 2525

units on their propensity scores, which are the probabilities of policy adoption conditional
on X and can be estimated using simple probit or logit models. A further assumption
needed to apply propensity score matching is the common support assumption ( p(Xi)o1),
which requires the existence of some comparable control units for each treated unit.11
Using propensity score matching, the ATT now can be estimated as:
ATT ¼ E½Y i1 jDi ¼ 1; pðX i Þ  E½Y i0 jDi ¼ 0; pðX i Þ. (3)
We consider a variety of commonly used propensity score matching methods. The first
method is nearest-neighbor matching with replacement, which matches each treated unit to
the n control units that have the closest propensity scores. We use two nearest-neighbor
matching estimators: n ¼ 1 and 3. The second method is radius matching, which matches a
treated unit to the control units with estimated propensity scores falling within radius r. We
use a wide radius (r ¼ 0.03), a medium radius (r ¼ 0.01), and a tight radius (r ¼ 0.005). The
third method is kernel matching, which matches a treated unit to all control units weighted in
proportion to the closeness between the treated unit and the control unit. The last method is
the regression-adjusted local linear matching developed by Heckman et al. (1998).

4. Estimating the treatment effects on inflation and its variability

This section estimates the treatment effects of inflation targeting (non-constant or constant)
on the level of inflation (CPIG), defined as the annual growth rate of CPI, and inflation
variability (CPIGSTD), defined as the standard deviation of a three-year moving average of
inflation, in the seven targeting countries. Fig. 1 illustrates the average inflation and inflation
variability in targeting countries and non-targeting countries from 1985 to 1999. There is a
clear downward trend in inflation (variability) during this period in both country groups.
Therefore, a naive comparison of pre-targeting inflation (variability) and post-targeting
inflation (variability) in targeting countries can lead to the false conclusion that inflation
targeting matters. Indeed, by looking at the figures, one can reasonably suspect that the low
inflation (variability) might be caused by some common uncontrolled factors that affect both
targeting and non-targeting countries. In the rest of this section, we will use propensity score
matching methods to estimate the treatment effects on the treated.

4.1. Estimating the propensity scores

We first estimate the propensity scores using a probit model. The dependent variable is
the targeting (either non-constant targeting (NCIT) or constant targeting (CIT)) dummy.
We consider two groups of control variables.12 The choice of the first group is based on the
literature that inflation targeting should be adopted only after some preconditions are
met.13 We choose the following five variables: the lagged inflation rate (CPIG_1), broad
money growth (BMG), government fiscal balance as a share of GDP (CGGDP), a
11
Estimating ATE requires a stronger common support condition (0op(Xi)o1), which requires the existence of
both comparable treated units for each control unit and comparable control units for each treated unit.
12
It is important to note that the goal of estimating the propensity score is not to find a best statistical model to
explain the probability of policy adoption. According to the conditional independence assumption, it is not a
problem to exclude variables that systematically affect the targeting probability but do not affect inflation
(variability) in the probit regressions. See Persson (2001) for detailed discussions.
13
See, for example, Truman (2003).
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2526 S. Lin, H. Ye / Journal of Monetary Economics 54 (2007) 2521–2533

0.10 0.035
0.09 0.030
0.08
0.025
0.07
0.06 0.020
0.05 0.015
0.04
0.010
0.03
0.02 0.005
0.01 0.000
1986 1988 1990 1992 1994 1996 1998 1986 1988 1990 1992 1994 1996 1998

Fig. 1. Average inflation and inflation variability in targeting countries and non-targeting countries. (a) Inflation,
(b) Inflation variability. Notes: Solid line indicates targeting countries. Dash line indicates non-targeting countries.

CBTOR5 as an inverse proxy of central bank independence, and real per capita GDP
growth rate (GDPPCG). We expect the first four variables to be negatively correlated with
the probability of adopting inflation targeting, and the last one to be positively correlated
with the probability. The second group of variables is used to control for the likelihood of
choosing exchange rate targeting as an alternative framework for the conduct of monetary
policy. We include a fixed exchange rate regime dummy (FIX) and trade to GDP ratio
(OPEN) as a measure of openness to trade in this group.14 Since exchange rate targeting is
more attractive to countries that have already adopted this policy and to countries that are
more open to trade, we expect to see negative coefficients on these variables.
The results are reported in Table 2. The two columns in Table 2 correspond to our two
targeting dummies NCIT and CIT. Most estimated coefficients have the expected signs.
We find that the lagged inflation rate, BMG, central bank governor turnover rate, and
fixed exchange rate regime dummy systematically affect a country’s targeting decision. The
estimated coefficients on these variables are all negative and significant, meaning that
countries with higher previous inflation, higher money growth, lower levels of central bank
independence, or fixed exchange rate regimes are less likely to adopt inflation targeting.
Other variables are not significant. The overall fit of these two regressions is reasonable
with pseudo-R-squares around 0.22.15

4.2. Results from matching

Before applying the matching methods, we want to make sure that our treated units
and control units share the same support, so that they are comparable. We sort all
the observations by their estimated propensity scores and then discard all the control
units whose estimated propensity scores are lower than the lowest score among the treated
14
We use the de facto exchange rate classification proposed by Reinhart and Rogoff (2004). Reinhart and
Rogoff classify exchange rate regimes into five broad categories: hard peg, soft peg, managed floating, freely
floating, and freely falling. We consider the first two categories as fixed regimes. A regime is classified as freely
falling if the annual inflation rate is higher than 40%. However, in our sample, no country experienced such high
inflation. Therefore, the omitted category contains only managed floating and freely floating regimes.
15
A pseudo R-square around 0.2 is comparable to an ordinary least-squares (OLS) adjusted R-square of 0.7. See
Louviere et al. (2000) for detailed discussions.
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Table 2
Probit estimates of propensity scores

Dependent variable

NCIT CIT

CPIG_1 18.798*** 19.768***

(5.695) (5.486)
OPEN 0.011 0.198
(0.315) (0.327)
BMG 3.911** 3.117*
(1.823) (1.793)

CBTOR5 2.426*** 2.445***

(0.792) (0.818)
GDPPCG 2.896 6.137
(2.964) (3.805)
CGGDP 0.430 1.398
(2.959) (3.214)
FIX 0.665*** 0.515**
(0.258) (0.267)
No. of obs. 321 321
Pseudo-R2 0.22 0.22

Notes: Constant terms are included but not reported. Robust standard errors are reported in parenthesis. *, **,
and *** indicate the significance level of 10%, 5%, and 1%, respectively.

units.16 Thus, 78 out of 276 control units are discarded when we use non-constant inflation
targeting, and 93 out of 280 control units are discarded when we use constant inflation
targeting.
The matching results based on these new samples are presented in Tables 3 and 4.17
Table 3 reports the estimated ATTs on the level of inflation, and Table 4 reports the
estimated ATTs on inflation variability. The upper panel of each table shows the ATTs of
non-constant inflation targeting, while the bottom panel shows those of constant inflation
targeting. The first two columns of each table show the results from one-to-one-nearest-
neighbor and three-nearest-neighbor matching. The next three columns report the results
from radius matching, with radii ranging from 0.5% to 3%. Local linear regression
matching and kernel matching results are shown in the last two columns of each table.
The results are strong and robust. The estimated ATTs in Table 3 are all found to be
quantitatively small and statistically insignificant. The average estimated ATT across
different matching methods and definitions of targeting is only about 0.17% in terms of
the annual inflation rate.18 The results on inflation variability are similar. The estimated

16
See Persson (2001). Keeping these observations does not change our results.
17
Matching estimates are obtained by using Stata command PSMATCH2 developed by Leuven and Sianesi
(2003).
18
For radius matching with medium radius and tight radius, a small number of treated units are discarded, for
no controls can be found within these radii. Other matching methods have employed all the treated units.
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2528 S. Lin, H. Ye / Journal of Monetary Economics 54 (2007) 2521–2533

Table 3
Matching estimates of treatment effect on the level of inflation

Nearest- 3-Nearest- Radius matching Local linear Kernel

neighbor neighbor regression matching
matching matching r ¼ 0.03 r ¼ 0.01 r ¼ 0.005 matching

Panel A. Treatment effect of non-constant inflation targeting on the level of inflation

ATT 0.0034 0.0018 0.0013 0.0012 0.0027 0.0014 0.0015
(0.0038) (0.0034) (0.0025) (0.0031) (0.0038) (0.0352) (0.0026)
No. of treated 45 45 45 44 40 45 45
No. of controls 31 75 198 166 108 198 198
No. of obs. used 76 120 243 210 148 243 243
Panel B. Treatment effect of constant inflation targeting on the level of inflation
ATT 0.0020 0.0010 0.0017 0.0010 0.0011 0.0018 0.0018
(0.0039) (0.0031) (0.0026) (0.0032) (0.0038) (0.2201) (0.0024)
No. of treated 41 41 41 40 37 41 41
No. of controls 32 76 185 153 113 187 187
No. of obs. used 73 117 226 193 150 228 228

Notes: A 0.06 fixed bandwidth and a biweight kernel are used for kernel and local linear regression matching.
Bootstrapped standard errors for ATT are reported in parenthesis. They are based on 500 replications of the
data. *, **, and *** indicate the significance level of 10%, 5%, and 1%, respectively.

Table 4
Matching estimates of treatment effect on inflation variability

Nearest- 3-Nearest- Radius matching Local linear Kernel

neighbor neighbor regression matching
matching matching r ¼ 0.03 r ¼ 0.01 r ¼ 0.005 matching

Panel A. Treatment effect of non-constant inflation targeting on inflation variability

ATT 0.0009 0.00004 0.0006 0.0005 0.0008 0.0007 0.0007
(0.0016) (0.0014) (0.0012) (0.0015) (0.0018) (0.0038) (0.0012)
No. of treated 45 45 45 44 40 45 45
No. of controls 31 75 198 166 108 198 198
No. of obs. used 76 120 243 210 148 243 243
Panel B. Treatment effect of constant inflation targeting on inflation variability
ATT 0.0003 0.0013 0.0018 0.0016 0.0015 0.0017 0.0018*
(0.0016) (0.0014) (0.0012) (0.0012) (0.0015) (0.0016) (0.0011)
No. of treated 41 41 41 40 37 41 41
No. of controls 32 76 185 153 113 187 187
No. of obs. used 73 117 226 193 150 228 228

Notes: A 0.06 fixed bandwidth and a biweight kernel are used for kernel and local linear regression matching.
Bootstrapped standard errors for ATT are reported in parenthesis. They are based on 500 replications of the data.
*, **, and *** indicate the significance level of 10%, 5%, and 1%, respectively.

ATTs are all quantitatively small, and some of them are even positive. Almost all of them
are insignificant. The only exception is the estimated ATT of constant inflation targeting
on inflation variability using kernel matching. However, it is only marginally significant at
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S. Lin, H. Ye / Journal of Monetary Economics 54 (2007) 2521–2533 2529

the 10% level and quantitatively small. Overall, the evidence from matching suggests that
inflation targeting has no significant impact on either inflation or inflation variability.19

5. Additional evidence from nominal interest rates and velocity

In this section, we employ the same propensity score matching methods to evaluate the
treatment effects of inflation targeting on long-term nominal interest rates and income
velocity of money.20 Long-term nominal interest rates are often used by policymakers as
an indicator of inflation expectations.21 Empirical studies in the literature have also shown
that real interest rates are fairly stable at long horizons, and that most of the movements of
long-term nominal interest rates are due to changes in expected inflation.22 If inflation
targeting can effectively lower the public’s expectations about inflation and inflation
variability, then both the level and variability of long-term nominal interest rates should
fall. The income velocity of money has also long been of interest to monetary
policymakers. The breakdown of monetarism in the 1980s was largely caused by volatile
velocity, which made targeting monetary aggregates an unreliable framework for
conducting monetary policy. Investigating the variability of velocity thus can help to
shed light on the window-dressing view. If inflation targeting is merely window dressing, it
should not affect velocity variability.
Fig. 2 illustrates the averages of long-term nominal government bond rates, bond rate
variability (defined as the standard deviation of a three-year moving average of bond
rates), and velocity variability (defined as the standard deviation of a three-year moving
average of the ratio of nominal GDP to M1) in targeting countries and non-targeting
countries from 1985 to 1999. There is a clear downward trend in long-term nominal
government bond rates in both country groups, while the downward trends in the two
variability series are less obvious. However, we can again observe that the movements in
each one of these series follow a very similar pattern in both country groups.
Formal empirical results from matching are presented in Tables 5–7.23 Tables 5 and 6
report estimated ATTs on the level and variability of long-term nominal government bond
rates. The results are striking: all estimated ATTs in Tables 5 and 6 are positive. There is
even some evidence, though it is very weak, that inflation targeting actually leads to higher
and more volatile long-term nominal interest rates. Unless one is willing to believe that
there have been dramatic increases in the level and variability of long-term real interest
rates in the targeting group, the above evidence implies that inflation targeting has not
significantly lowered the public’s expectations of inflation and inflation variability. Similar
results can be found when we apply matching methods to velocity variability. A majority
of the estimated ATTs are positive and no single ATT is statistically significant in Table 7.
There is no evidence that inflation targeting leads to more stable money demand in
targeting countries.
19
In fact, all the estimated ATTs on inflation and most of the estimated ATTs on inflation variability are
insignificant even at the 20% level.
20
We would like to thank an anonymous referee for this suggestion.
21
See Goodfriend (1993, 1998) and Goodfriend and King (2005).
22
See, for example, Barr and Campbell (1997).
23
These matching results are based on the same estimated propensity scores used in Section 4. Again, control
units whose estimated propensity scores are lower than the lowest score among the treated units are discarded to
ensure comparability.
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13 1.8
12 1.6
11
1.4
10
9 1.2
8 1.0
7
0.8
6
5 0.6
4 0.4
1986 1988 1990 1992 1994 1996 1998 1986 1988 1990 1992 1994 1996 1998

1.0
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
1986 1988 1990 1992 1994 1996 1998

Fig. 2. Average long-term nominal interest rates, interest rate variability and velocity variability in targeting
countries and non-targeting countries. (a) Long-term nominal interest rates. (b) Long-term nominal interest rate
variability. (c) Velocity variability. Notes: Solid line indicates targeting countries. Dash line indicates non-
targeting countries.

Table 5
Matching estimates of treatment effect on the level of long-term nominal interest rates

Nearest- 3-Nearest- Radius matching Local linear Kernel

neighbor neighbor regression matching
matching matching r ¼ 0.03 r ¼ 0.01 r ¼ 0.005 matching

Panel A. Treatment effect of non-constant inflation targeting on the level of long-term nominal interest rates
ATT 0.3881 0.5846 0.7776** 0.6898 0.3175 0.7439 0.7392*
(0.6033) (0.4759) (0.3852) (0.4846) (0.5703) (0.8443) (0.3826)
No. of treated 45 45 45 44 38 45 45
No. of controls 36 80 197 169 105 197 197
No. of obs. used 81 125 242 213 143 242 242
Panel B. Treatment effect of constant inflation targeting on the level of long-term nominal interest rates
ATT 1.1461* 0.9098* 0.7554* 0.7985 0.8382 0.7713 0.6680*
(0.6070) (0.5043) (0.4171) (0.4989) (0.5940) (0.8045) (0.3908)
No. of treated 41 41 41 39 35 41 41
No. of controls 33 74 184 150 115 186 186
No. of obs. used 74 115 225 189 150 227 227

Notes: A 0.06 fixed bandwidth and a biweight kernel are used for kernel and local linear regression matching.
Bootstrapped standard errors for ATT are reported in parenthesis. They are based on 500 replications of the data.
*, **, and *** indicate the significance level of 10%, 5%, and 1%, respectively.
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S. Lin, H. Ye / Journal of Monetary Economics 54 (2007) 2521–2533 2531

Table 6
Matching estimates of treatment effect on long-term nominal interest rate variability

Nearest- 3-Nearest- Radius matching Local linear Kernel

neighbor neighbor regression matching
matching matching r ¼ 0.03 r ¼ 0.01 r ¼ 0.005 matching

Panel A. Treatment effect of non-constant inflation targeting on long-term nominal interest rate variability
ATT 0.1537 0.1957 0.2070** 0.1850 0.2246 0.1960 0.1886*
(0.1395) (0.1158) (0.1002) (0.1330) (0.1581) (0.1617) (0.0975)
No. of treated 45 45 45 44 39 45 45
No. of controls 34 82 196 168 103 196 196
No. of obs. Used 79 127 241 212 142 241 241
Panel B. Treatment effect of constant inflation targeting on long-tem nominal interest rate variability
ATT 0.1019 0.1750 0.1699 0.1797 0.0426 0.1782 0.1674
(0.1500) (0.1334) (0.1167) (0.1363) (0.1624) (0.1665) (0.1098)
No. of treated 41 41 41 40 35 41 41
No. of controls 71 74 183 147 111 185 185
No. of obs. used 30 115 224 187 146 226 226

Notes: A 0.06 fixed bandwidth and a biweight kernel are used for kernel and local linear regression matching.
Bootstrapped standard errors for ATT are reported in parenthesis. They are based on 500 replications of the data.
*, **, and *** indicate the significance level of 10%, 5%, and 1%, respectively.

Table 7
Matching estimates of treatment effect on velocity variability

Nearest- 3-Nearest- Radius matching Local linear Kernel

neighbor neighbor regression matching
matching matching r ¼ 0.03 r ¼ 0.01 r ¼ 0.005 matching

Panel A. Treatment effect of non-constant inflation targeting on velocity variability

ATT 0.1032 0.0627 0.0743 0.0990 0.1124 0.0675 0.0687
(0.0865) (0.4759) (0.0631) (0.0711) (0.0907) (0.0844) (0.0597)
No. of treated 45 45 45 43 36 45 45
No. of controls 36 82 196 160 113 196 196
No. of obs. used 81 127 241 203 149 241 241
Panel B. Treatment effect of constant inflation targeting on velocity variability
ATT 0.0059 0.0091 0.0234 0.0092 0.0382 0.0186 0.0222
(0.0957) (0.0761) (0.0659) (0.0748) (0.1103) (0.0541) (0.0605)
No. of treated 41 41 41 39 36 41 41
No. of controls 32 72 183 161 114 185 185
No. of obs. used 73 113 224 200 150 226 226

Notes: A 0.06 fixed bandwidth and a biweight kernel are used for kernel and local linear regression matching.
Bootstrapped standard errors for ATT are reported in parenthesis. They are based on 500 replications of the data.
*, **, and *** indicate the significance level of 10%, 5%, and 1%, respectively.

6. Conclusions

We evaluate the average treatment effect of inflation targeting in seven industrial

countries that adopted this policy in the 1990s. We carefully address the self-selection
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2532 S. Lin, H. Ye / Journal of Monetary Economics 54 (2007) 2521–2533

problem ignored in previous empirical studies. Using propensity score matching methods,
we find that the average treatment effects of inflation targeting on inflation and inflation
variability are quantitatively small and statistically insignificant in these seven countries.
The treatment effects on long-term nominal interest rates and income velocity of money
are also found to be insignificant.
Our results should be interpreted carefully. First, although no non-targeter in our
sample has publicly announced any inflation targets, some of them do have policies very
similar to those of the targeters. For example, the United States is often considered an
‘‘implicit targeter.’’ Therefore, it cannot be concluded from our results that efforts made by
central banks to reduce inflation are unimportant. Rather, our results imply that central
banks’ deeds matter more than their words. The additional explicit announcement of a
specific inflation target seems to have very little effect on the outcomes. Second, as many
emerging market economies and transition economies have adopted inflation targeting
recently, it would be interesting to investigate the treatment effects in these countries. Our
results may not necessarily apply to these countries, for their economic and social
structures are very different from those of industrial countries. Finally, as Ball and
Sheridan (2003) correctly point out, an insignificant treatment effect cannot be used as
evidence against inflation targeting as long as no harmful effect is found. Inflation
targeting may have other benefits not investigated in our study.

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